Delaware, New York judges clash over control of merger cases

February 06, 2013|Reuters

By Tom Hals

Feb 6 (Reuters) - A group of lawsuits by shareholdersobjecting to the sale of the New York Stock Exchange has putstate judges in Delaware and New York on a collision course,highlighting a recent boom in a chaotic and sometimes costlytype of litigation.

Almost as soon as mergers are announced, they are met withlegal challenges from shareholders, with similar lawsuits oftenappearing in two different state courts. The lawsuits usuallysettle quickly, but nevertheless they have become a growingheadache for companies that are being bought out.

This proliferation prompted Leo Strine, the chief judge onDelaware's Court of Chancery, to publish a detailed proposallast month for corralling such cases in his court. But as thelawsuits over the New York Stock Exchange sale show, the biggestopposition to his proposal may come not from plaintiffs'attorneys but from other judges.

NYSE Euronext announced on Dec. 20 it had agreed tobe bought by IntercontinentalExchange Inc for $8.2billion. NYSE shareholders immediately sued, saying itsdirectors had breached their duties by selling the company toocheaply.

The first lawsuit was filed by an individual investor in theCourt of Chancery in Delaware, where NYSE is incorporated. Soonafterwards, a union pension fund filed a similar lawsuit instate court in New York, where the NYSE does business. Severalmore cases were soon filed in each court.

The cases, which seek class action status, are proceeding inparallel, in what is known as multiforum litigation, raising thepossibility of duplicate discovery, depositions, hearings andlegal costs.

PLEASE TELL ME IT'S NOT STRINE

While federal courts have procedures to prevent overlappinglitigation, there is no easy way to coordinate state-levelcases, and the two judges overseeing the cases have verydifferent views of which case should take precedence.

Last month, Strine, who is hearing the Delaware case,co-authored a 104-page paper arguing that such cases should bein the court that specializes in the law governing the dispute.

For merger class actions, which are internal corporatedisputes between directors and shareholders, that wouldgenerally be Delaware, which is home to about two-thirds of thelargest U.S. corporations.

Strine argued that the "first-filed" system, which in manystates gives precedence to the oldest lawsuit, just encourageshastily drafted complaints and a race to the courthouse byplaintiffs' attorneys.

On Jan. 10, the same day that Strine's paper was publishedby Harvard Law School, Justice Shirley Kornreich was holding ahearing to consolidate five class actions filed in New York overthe NYSE sale.

According to a transcript, when she learned of the parallelcases in Delaware, she said: "Who - please tell me it's notChancellor Strine who has the Delaware cases?"

In a subsequent interview with Reuters, Kornreich said thatthe court in the state of incorporation may be trumped by thecourt in the state with the actual operations, which she saidhas "an economic interest" in the litigation.

"As a matter of policy they are going to hold onto it," shesaid, referring to states where businesses operate. Kornreichsaid she was talking about parallel cases in general and notspecifically about the NYSE cases.

AVOIDING A FOOD FIGHT

Kornreich acknowledged parallel cases are a problem, but shesaid it should be possible for two state courts to workside-by-side, issuing identical orders and coordinatingdiscovery.

"What I think is, there shouldn't be a food fight. Itdemeans the court," she said.

Strine declined to comment. But in his paper, he said thatjudges in different states are often unable to work together.Some judges might find the class actions "intellectually andreputationally more rewarding than a more standard diet ofroutine civil or criminal cases," he wrote. He said a judge mayalso, out of loyalty, want to keep cases in the bar where theyhad practiced as attorneys.

Kornreich, who said she had not seen Strine's paper,bristled at the suggestion that other judges were to blame."What is he doing, pointing the finger at another jurisdiction'sjudges and blaming them for this?" she asked.

Defendants often describe these cases as meritless, but theygenerally settle them quickly so they can move to close theirdeals. The settlements typically provide added information forinvestors and fees for the plaintiffs' attorneys, which averagearound $1.2 million according to Cornerstone Research.

The U.S. Chamber of Commerce, which has long pushed forlimiting class actions, in a recent paper called the cases"extortion through litigation, plain and simple."

Plaintiffs' attorneys, however, say the cases serve as akind of private regulation ensuring deals are fair, and lawsuitsover the sales of Del Monte Foods and El Paso Corp unearthedsignificant conflicts.